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India may raise borrowings to feed sluggish economy

India's plans to rev up its sluggish economy through government spending, has raised fears a fresh flood of bond issues is in the offing.

Last weekend Finance Minister Yashwant Sinha said he would step up government spending to try to kickstart economic activity.

But the cash-strapped government -- the central fiscal deficit was 5.2 per cent in 2000-01 (April-March) -- has limited options to raise money, analysts and traders say.

Revenue collections have been poor, with tax and non-tax revenues in the first month of the current fiscal year totalling only 3.7 per cent and 2.4 per cent respectively of the amount budgeted for the full year.

A sluggish economy offers little hope of a pick-up in collections.

Monetisation, or printing of currency, is one option but this is unlikely to find much favour, given that it could stoke inflation, which is currently benign.

Analysts say fresh bond issues seem the most viable option for the government to raise money, given the easy domestic liquidity. Banks are sitting on a pile of cash, thanks to poor demand for loans in a slowing economy.

But if there are more issues, traders fear bond yields will go up due to investor fatigue. Yields could also go up if the economy revives and there is a pick-up in demand for bank funds. Estimates of the additional borrowings range from 150 billion rupees ($3.18 billion) to 300 billion.

The government has budgeted gross market borrowings at about Rs 1.19 trillion for 2001-02, of which it has already raised about 54 per cent in just over three months.

OVERSHOOTING THE TARGET

"The government is expected to overshoot its borrowing target," said Narendra Gupta, head of trading at the private sector ICICI Bank said.

"To start with given the slowdown in the economy, its revenues target is ambitious as is its divestment (privatisation) target," Gupta said.

Tax revenues for the year are estimated at Rs 1.63 trillion, up 13 per cent versus the previous year.

Analysts see this as ambitious, given the slowing economy.

GDP growth is estimated to have slowed to 5.2 per cent in 2000-01 from 6.4 per cent a year earlier and latest data suggest there is no turnaround in sight.

Industrial growth slumped to 2.6 per cent in April-May, the first two months of the current financial year, compared with 6.2 per cent in the previous year.

While a 5.2 per cent GDP growth is impressive, given current global trends, it is well below the annual average of 6.5 per cent of the previous five years.

YIELDS NOT SEEN RISING MUCH

Bond yields may not be pushed up much by increased government borrowings as cash-rich banks do not have other investment avenues, some traders say.

Despite the spate of issues since the start of the current fiscal in April, yields have recently dropped to historic lows thanks mainly to easy money market liquidity.

"We can expect the central bank to manage the overshoot so as not to have too much of an impact on yields," said S Ananthnarayanan, vice-president at Kotak Mahindra Capital Company, a private sector primary dealer.

The one concern on the liquidity front, he said, was a pickup in industrial activity.

"I don't see a revival for at least nine months, but if there is a pick up earlier than expected, credit could pick up and the situation could change," Ananthnarayanan said.

So far in the financial year, banks' deposits have grown 4.7 per cent up to June 15 but loans by just 1.5 per cent.

And if bank's overall support to the commercial sector is taken (which includes investments in companies' shares, bonds and other instruments) there has been a slight drop.

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